Friday, October 28, 2011

How the IRS Screws Transit Riders and Rewards Drivers

It is the season of choosing benefits for 2011 for many people, and that means that we get to pour over details of the commuter benefits section of the IRS tax codes.* For 2011, many transit riders get screwed. In 2010 workers were able to pay for up to $230 per month of transit fares with pre-tax income, thus reducing their taxable wages. There was also a $230 allowance for parking. Starting in 2011, the IRS will only allow $120 in transit fares to be paid with pre-tax income, yet parking remains at $230. See IRS Publication 15-B for details (pdf).

In many cases, and certainly for most low income workers who rely on transit, $120 per month is more than adequate for a transit pass. The lowest income workers are also unlikely to take advantage of the tax break for various reasons, so perhaps this tax change isn't that big of a deal. But for people who rely on commuter rail $120 does not cover there monthly fares. For someone in the New York area, this change in the tax code will cost them about $360 per year in taxes (if they pay about 25% of wages in taxes, which is probably low). Is that enough to change behavior and cause these workers to switch to driving? Perhaps if their employer provides parking. But more importantly, these tax expenditures reflect the misplaced priorities of US transportation policy, which I will summarize in haiku since that seems to be the thing to do this week:

Parking should be free/
Priority to drivers/
Poor alternatives

*It's not obvious to me why we have commuter benefits in the tax code. It seems the value of commuting is that you earn money at a job. No one is making decisions at the margin about whether or not to have a job based on commuter benefits, but people do make locational and transportation decisions based on the distorted economics of these tax-free benefits.
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